Lessons From The Sharing Economy

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Editor’s note:Raj Kapoor is the co-founder and CEO of fitmob, previous managing director at Mayfield Fund and former co-founder and CEO of Snapfish.

Companies everywhere are jumping on the sharing economy trend. From sharing skills to houses to cars, the sharing economy is transforming many industries. Technology has lowered the barriers so that anyone can provide services blurring the line between “personal” and “professional.”

The consumer peer-to-peer rental market alone is worth $26 billion. Private investors are noticing as Airbnb recently received a $10 billion valuation, and startups like Lyft, Poshmark, fitmob and Uber, which received a $17 billion valuation in its last round, are gaining traction while consumers benefit from lower prices, higher quality, and unprecedented convenience.

But this model doesn’t work for every industry. From my years investing in and running companies in the sharing economy, I’ve noted several necessary ingredients for a company built on this model to succeed:

No Pain …

Sharing economy models work great when there is a high degree of consumer pain. As the saying goes, “if it ain’t broke, don’t fix it.” In a lot of markets, consumers are happy with the status quo, and it will be hard to get user adoption. A good example of this is Cherry, which started as an on-demand car-washing service.

There wasn’t a high enough pain point and frequency for the consumer to change their habit and adopt it – despite the convenience. A sharing economy business works best when it’s hacking an everyday pain point and is something that the average consumer would realistically use multiple times a week.

For ridesharing and fitness, the consumer pain is more obvious. Until Uber and Lyft, it was impossible to hail a taxi in most cities, a huge pain to force drivers to accept your credit card, and an all-around unpleasant experience in the car.

When you look at the fitness industry, it’s generating $75 billion each year on gym fees, yet 60 percent of people who belong to gyms don’t even go and our nation’s growing obesity and inactivity problem are evidence the solution isn’t working. Lyft and fitmob hack these pain points by creating an experience that is fun, accessible with the push of a button, and affordable giving consumers clear benefits that are lacking in traditional services.

Curation Is King

While it’s great to have a beautifully designed app for a sharing economy marketplace, the offline service experience is harder to master and the most impactful. The consumer remembers the service experience far more than the buttons they pushed to make it happen.

The quality and safety risks are high in a sharing economy model as the supplier is not a brand or a professional. For that reason, it’s critical that the offline experience be highly curated to delight consumers, feel safe and be consistent – especially in the early days when word of mouth is critical.

Until the culture and brand of the service is set and there are abundant ratings, each supplier needs to be picked carefully and monitored. It’s tempting for a sharing economy marketplace to simply open its doors and allow any supplier to provide services to consumers and let the market decide. However, this results in a variable consumer experience and may cause negative word of mouth to go “viral” – a vicious cycle.

With Lyft, there is a deep focus on the quality of the offline experience. When Lyft evaluates drivers, they ask themselves – would I hire this person to work at the front desk of a top hotel? So much of what makes the sharing economy work is based on human connections and community, not technology.

You Can’t Ignore the Government

One of the biggest challenges in the sharing economy is regulatory laws that either significantly slow down or outright don’t permit these new services. Our current regulatory structure is geared toward professional, large-scale businesses and didn’t contemplate consumers becoming providers in their spare time or the use of public assets to provide these services. What makes it even more challenging is that the regulations are rarely at the national level – they are often at the city or state level which can be expensive and time consuming for a startup to navigate.

Companies rarely succeed in ignoring these regulations. They may start that way (you have more leverage if you can show consumer support before petitioning to change regulations), but eventually they work hand in hand with the government and regulators to create a win-win for all parties – the business, consumers and regulators.

Laws need to change to keep up with the new technology, such as what California did for the ride-sharing industry – the first state to create a new regulatory framework for these startups. Companies also have the responsibility to proactively engage with the city officials to decrease the amount of shutdowns and suspensions that we’ve seen across the country in ridesharing to the current battle with Airbnb and New York.

At fitmob, we faced a challenge in using the public parks for residents to have workouts. The park system didn’t contemplate that outdoor fitness would be so popular and it presents challenges in a balanced use of parks. After casually using the parks and hearing of complaints, we reached out to SF Recreation and Parks to work out an agreement that allowed us to work collaboratively. By creating a relationship early we were able to foresee issues and propose solutions that benefit both parties.

Running a Sharing Economy Business Isn’t Cheap

The common misconception that the sharing economy requires very little capital and just requires some good code and design couldn’t be further from the truth. Airbnb, Lyft and Uber have all raised hundreds of millions of dollars. Just to launch fitmob and prove product market fit we raised over $9 million in equity and venture debt financing. Why?

First, in the early days it’s critical to curate and have the best “supply”. Often times the platform needs to subsidize the best providers to have them forego their current opportunities and solve the “chicken or egg” problem. Lyft, Uber, and fitmob all had to pay providers some sort of “floor” initially to make it worth their while when consumer demand was not predictable. Second, these are hyperlocal businesses that require very targeted seed marketing to get the flywheel going.

Once you’ve nailed the business in one market and move to a new city, it’s like building a new company from scratch. Third, like other startups, there is a war to hire the best talent but these businesses require broader expertise than just tech – they need local marketing, logistics, market experts and regulatory firepower. It may be cheap to build a marketplace app, but not to provide a consistent high-quality service and scale it across multiple locations.

While several companies are on the fast track to successful global businesses in the sharing economy, many entrepreneurs are still figuring out what types of businesses do and don’t work running on this model. One thing is certain – the future of the sharing economy will be exciting.